The principles of tax policy

Written evidence submitted by the Scotch Whisky Association

1. Executive Summary

1.1 The Scotch Whisky Association (SWA) is the industry’s representative body, with a remit to protect and promote Scotch Whisky worldwide. Its 56 member companies – Scotch Whisky distillers, blenders and bottlers – account for over 90% of the industry.

1.2 Annual shipments of Scotch Whisky exceed £3.1bn in customs value, representing 15% of total Scottish exports (exc. oil and gas) and almost a quarter of total UK food & drink exports. The industry is worth £4bn a year in added value to the economy, supporting 35,000 jobs.

1.3Scotch Whisky sales in the UK contribute between £600m-£700m annually in excise duty, with the spirit drink sector as a whole generating around £2.4bn a year in UK excise receipts. There are of course significant additional sectoral tax receipts from the likes of VAT, National Insurance, and corporation tax liabilities.

1.4The Association believes that any tax system should be fair, simple, transparent, and not distort competition. It should aim to maximise revenue efficiently, whilst supporting growth and not undermining competitiveness. In relation to alcoholic beverages, there is also an opportunity to support other Governmental policy goals by putting in place a system that protects not skews consumer choice and which is socially responsible.

1.5The alcohol excise duty system is a useful case study to help assess the key principles of tax policy. Regrettably, the regime fails to reflect any of these principles in a meaningful way and is no longer fit for purpose. The application of the current excise duty escalator at the same rate across all drinks categories compounds the problem.

1.6 The SWA welcomes the Committee’s inquiry as a timely opportunity to look at the fundamental principles of tax policy in the UK. Our comments are based on the industry’s experience of the UK excise duty system.

2. UK excise duty regime

2.1 Spirit drinks in the UK are subject to a high excise duty rate of £23.80 per litre of pure alcohol, which is the fourth highest level of duty applied in the EU. As a result, once VAT is applied, over 70% of the average retail price of a bottle of Scotch Whisky is tax.

2.2 Whilst the alcohol excise duty system remains based on the market conditions of a century ago, the UK drinks market and consumer preferences have changed dramatically. The excise duty system has, however, failed to keep pace with these changes. Instead, competition and consumer choice in the UK drinks market is unfairly distorted by tax policy and structures. It also works to penalise a uniquely British industry, Scotch Whisky.

2.3 Alcohol served as Scotch Whisky is taxed 250% higher than the same amount of alcohol served as cider, 37% higher than beer and 30% higher than wine. As a result, pub measures containing approximately the same amount of alcohol, vary in excise duty: compare, for example, a half pint of beer at 3.52% vol. (17.31p in duty), a 125ml glass of wine at 12.5% vol. (18p), and a 25ml measure of Scotch Whisky at 40% vol. (23.80p). This tax distortion between alcoholic drinks categories is compounded when the same duty escalator is applied to all categories.

2.4 The Association supports a gradual move to excise duty equalisation, a system where all alcohol is taxed on the same basis according to alcohol content. This would better reflect the key principles of tax policy set out below.

3. Key Principles of Tax Policy

3.1 Tax arrangements should be simple and transparent for consumers and operators. The alcohol excise duty system fails to deliver on such principles. HM Revenue & Customs’ annual Budget notice contains no less than 14 separate alcoholic drink categories subject to varying duty rates and reliefs. This is despite the EU’s excise structures legislation providing the flexibility to implement a simpler and fairer system based on an approximation of duty rates across the different drinks categories. The existing arrangements are overly complex and should be simplified within the framework of European legislation.

3.2 The SWA works closely with Government to secure fair access and a level tax playing field in export markets. Fairness is a fundamental concept that should underpin any tax system. However, despite alcohol being alcohol, regardless of whether it is served as cider, beer, wine or spirits, the excise duty tax system unfairly discriminates between competing products. This distorts the market and consumer choice.

3.3 It is the Government’s role to structure duty arrangements in a way that secures revenue in the most efficient and effective way, whilst supporting growth and not disrupting competitiveness. Existing alcohol duty arrangements fail to satisfy these important principles.

3.4 In the summer of 2010, the Association commissioned two separate studies of the revenue impact of excise duty reform, based on the most up to date price elasticities available. The detailed reports by PricewaterhouseCoopers LLP and Optimal Economics Ltd both concluded that reform based on duty equalisation across the drinks categories would be likely to increase alcohol tax revenues by over £1bn a year (the equivalent of around 11% of annual alcohol receipts).

3.5 The PwC analysis suggested duty equalisation could raise additional revenue of between £5.7bn and £7.5bn on a cumulative basis between 2011/12 and 2014/15. While taking different approaches to the direct impact of duty equalisation, the studies demonstrate a consistent directional outcome of higher revenue from duty and VAT flowing to Government at a time when the public finances are under considerable pressure. The Institute for Fiscal Studies has also advocated reform of the alcohol duty regime, with duty based on alcohol content (‘The Impact of introducing a Minimum Price on Alcohol in Britain’, IFS Briefing Note 109, November 2010.) Disappointingly, the November 2010 Treasury ‘Review of alcohol taxation’ failed to make any assessment of the revenue implications of reform.

3.6 The system, instead, continues to undermine the competitiveness of a key British industry by discriminating against Scotch Whisky in its home market. Domestic tax reform on the basis of the principles set out above would do much to support the sector’s competitiveness in what is its third largest market. This would remove disincentives to invest in the UK market and support smaller distillers who rely on domestic sales as a foundation for their businesses.

3.7 Tax reform would also support a key manufacturing and export sector at a time when the Government, rightly, wants to re-orient the economy in that direction. It would set a welcome and influential precedent that could be used as a positive example in negotiations over tax discrimination in Scotch Whisky’s export markets.

4. Supporting other policy goals

4.1 The SWA supports the long held Treasury position that tax policy is not the best lever to address social issues, such as alcohol misuse. However, tax arrangements can still be structured to help support specific policy goals.

4.2 The Government, for example, believes it important to support the domestic pub trade. PwC modelling indicates that reform could encourage an increase in on-trade purchases of some drinks, delivering benefits to that sector.

4.3 The duty structure not only distorts competition, but it also erroneously implies that lower strength products are in some way healthier. Approximating duty equally across all drinks, according to alcohol content, would help promote individual responsibility, raise awareness of moderate consumption and help underpin the message that it is the amount of alcohol consumed and the pattern of consumption that is important, not the type of drink chosen. It might also encourage a trend to the production of lower alcohol strength drinks where allowed by law to take advantage of a lower duty rate, in a non-competitively distorting way.

4.4 Duty equivalence offers the Government an opportunity to introduce a more socially responsible system, by taxing the amount of alcohol consumed rather than the type of drink chosen. This approach would directly address concerns around the price of ‘high strength, low priced’ products, but avoids inevitable difficulties in defining what constitutes a ‘problem drink’. With the Home Office consulting on a UK-wide ban on sales below cost, there is also an opportunity to set a legal ‘floor price’ for alcohol by basing the system on no sales below tax (excise duty plus VAT on that duty).

5. Conclusion

5.1 The SWA believes a number of key principles should underlie tax policy. Arrangements should seek to be as fair as possible, as well as simple and transparent. Competitiveness and growth should be supported, whilst maximising revenue in the most efficient way.

5.2The UK alcohol duty system is a case study of the non-application of such fundamental principles. It should be reformed to create a system that promotes consumer choice and fair competition. Duty equivalence – taxing all drinks on the same basis according to alcohol content - offers the opportunity to enhance revenues, support a key British industry, and introduce a socially responsible system.